It is no coincidence that most wealthy people invest in the stock market. While fortunes can be both made and lost, investing in stocks is one of the best ways to create financial security, independence, and generational wealth. Whether you are just beginning to save or already have a nest egg for retirement, your money should be working as efficiently and diligently for you as you did to earn it. To succeed in this, however, it is important to start with a solid understanding of how stock market investment works. This article will guide you through the process of making investment decisions and put you on the right path to becoming a successful investor. This article discusses investing in stocks specifically. For stock trading, see How to Trade Stocks. For mutual funds, see How to Decide Whether to Buy Stocks or Mutual Funds.
Make a list of things you want. To set your goals, you’ll need to have an idea of what things or experiences you want to have in your life that require money. For example, what lifestyle do you want to have once you retire? Do you enjoy traveling, nice cars, or fine dining? Do you have only modest needs? Use this list to help you set your goals in the next step.
- Making a list will also help if you are saving for your children’s future. For example, do you want to send your children to a private school or college? Do you want to buy them cars? Would you prefer public schools and using the extra money for something else? Having a clear idea of what you value will help you establish goals for savings and investmen
- Set your financial goals. In order to structure an investment plan, you must first understand why you are investing. In other words, where would you like to be financially, and how much do you have to invest to get there? Your goals should be as specific as possible, so that you have the best idea of what you’ll need to do to achieve them.
Popular financial goals include buying a home, paying for your child’s college, amassing a “rainy day” emergency fund, and saving for retirement. Rather than having a general goal such as “own a home,” set a specific goal: “Save $63,000 for a down-payment on a $311,000 house.” (Most home loans require a down payment of between 20% and 25% of the purchase price in order to attract the most affordable interest rate.)
Use a college cost calculator to determine how much you will need to save for your children’s college, how much parents are expected to contribute and the various types of financial aid your children may qualify for, based on your income and net worth. Remember that costs vary widely depending on the location and type of school (public, private, etc.). Also remember that college expenses include not only tuition, but also fees, room and board, transportation, books and supplies.
Remember to factor time into your goals. This is especially true for long-term projects such as retirement funds. For example: John begins saving at age 20 using an IRA (Individual Retirement Account) earning an 8% return. He saves $3,000 a year for the next ten years, then stops adding to the account but keeps the IRA invested in the market. By the time John is 65, he will have $642,000 built up.
Many websites have “savings calculators” that can show you how much an investment will grow over a given length of time at a specified interest rate. While they’re not a substitute for professional financial advice, these calculators can give you a good place to start.
- Once you determine your goals, you can use the difference between where you are today and where you want to be to determine the rate of return needed to get there.
- Make sure you consider both your short-term and long-term goals.
Learn about the market. Spend as much time as you can reading about the stock market and the larger economy. Listen to the insights and predictions of experts to develop a sense of the state of the economy and what types of stocks are performing well. There are several classic investment books that will give you a good start:
- The Intelligent Investor and Security Analysis by Benjamin Graham are excellent starter texts on investing.
- The Interpretation of Financial Statements by Benjamin Graham and Spencer B. Meredith. This is a short and concise treatise on reading financial statements.
- Expectations Investing, by Alfred Rappaport, Michael J. Mauboussin. This highly readable book provides a new perspective on security analysis and is a good complement to Graham's books.
- Common Stocks and Uncommon Profits (and other writings) by Philip Fisher. Warren Buffett once said he was 85 percent Graham and 15 percent Fisher, and that is probably understating the influence of Fisher on shaping his investment style.
- "The Essays of Warren Buffett," a collection of Buffett's annual letters to shareholders. Buffett made his entire fortune investing, and has lots of very useful advice for people who'd like to follow in his footsteps. Buffett has provided these to read online free: www.berkshirehathaway.com/letters/letters.html.
- The Theory of Investment Value, by John Burr Williams is one of the finest books on stock valuation.
- One Up on Wall Street and Beating the Street, both by Peter Lynch, a highly successful money manager. These are easy to read, informative and entertaining.
- Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay and Reminiscences of a Stock Operator by William Lefevre use real-life examples to illustrate the dangers of emotional overreaction and greed in the stock market.
- You can also enroll in basic or beginner investment courses offered online. Sometimes these are offered free by financial companies such as Morningstar and T.D. Ameritrade. [13] [14] Several universities, including Stanford and MIT, offer online investment courses.[15] [16]
- Community centers and adult education centers may also offer financial courses. These are often low-cost or free and can provide you with a solid overview of investment. Look online to see if there are any in your area.
- Practice by “paper trading.” Pretend to purchase and sell stocks, using the closing prices each day. You can literally do this on paper, or you can sign up for a free practice account online at places such as How the Market Works. Practicing will help you hone your strategy and knowledge without risking real money.
Formulate your expectations for the stock market. Whether you are a professional or a novice, this step is difficult, because it is both art and science. It requires that you develop the ability to assemble a tremendous amount of financial data about market performance. You also must develop “a feel” for what these data do and do not signify.
- This is why many investors buy the stock of products that they know and use. Consider the products you own in your home. From what’s in the living room to what’s inside the refrigerator, you have first-hand knowledge of these products and can quickly and intuitively assess their performance compared with that of competitors.
- For such household products, try to envision economic conditions that might lead you to stop purchasing them, to upgrade, or to downgrade.
- If economic conditions are such that people are likely to buy a product you are very familiar with, this might be a good bet for an investment.
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